professional colleagues proceeded you. but, never the less, in much the same way that stephanie defines her role in the think tank as having concerns, my role is to talk when i'm asked to talk. so i will do that. but i'll try to keep it short so we get to questions. one of the things that we con standpoi substantia constantly look at in washington between strategy and resources. we usually talk about the strategy resources mismatch, where we're not spending enough resources to execute the strategy. it's very interesting that we had a base budget that had a strategy, the to 20 10 defense review strike that squie. it was right there. then, that defense budget which had projected a 1% increase in real dollars was flattened. actually, not completely flattened. as president obama said, there was a slight increase to the defense budget.

yeah, we have a new strategy. i put together along with a colleague of mine, a defense draw down working group. and we had a big debate. what's the difference between a strategy and strategic guidance? the 5 january strategic guidance. that's really just guidance emanating from the 2010 strategy. but that was dispelled right away because both pinetta and general dempsy referred to it as a new strategy, even though it was a strategic guidance. it's true, more attention paid to the precise priorities within it. but if we had had any doubt whether or not it was a new strategy, it is a new strategy. well, the sequesters are another 600 billion, or 575 billion, demanding on how you estimate it. will that mean that we have another new strategy? well, he says sequesters are like taking a chain saw to the budget. and out of the rubble of the

budget, you create a new strategy. i'm actually a strategyist. and i hadn't realized that our strategies were so vulnerable to relatively modest changes in the resource level. because we've been told right now, well, the first strategy couldn't withstand a 1% decrement. and now we have another decrement that we might be another 5-6%. we'll have a new strategy out of the rubble of the old budget. so i really think that our strategies need to be a little bit more robust than that. and maybe we should be looking further ahead to say, well, maybe we might have a real reduction. a real reduction along the lines of the 25-35% reductions. and we should think about what are our priorities under those circumstances. and then cast backwards. rather than be where we are now, every time there's an increment, we say we've got a new strategy. secondly, the question was asked

often in the commentary that i didn't have time to read this morning. there's not a lot of big cuts here. you know? there's no big showy, gaudy cuts. doesn't this reflect the fact that there's no real pain. and in the press conference yesterday, they were all very eager to say lots of hard decisions, very complex. very tough. i think carter said at one point there are 50 or 60 things in this budget that we want to do, we can't afford to do anymore. i would argue this is just a subtle version of the washington monument strategy. there's lots of big cuts out there that could have taken off the 11th carrier, they could have done deeper cuts in ground forces. those are all standing right there, but they're for the negotiation over what's going to replace sequester. nobody wants sequester because it's across the board and a very deep rate of reduction. this is what todd has made.

it's not just the size of reduction, it's how steeply it's administered during that time. so there's going to be a negotiation over what will replace sequester. because the only way to avoid sequester is to have an agreement to replace sequester. that will involve more cuts to defense. there will be a more reasonable glide path that will be targeted. it won't be across the board the way the sequester mechanism illustrates. and i think the other thing that underscore social security that we have to do something about pay it benefits. the pen gont has been saying for several years now, our current rate of increase is unsustainable. one of my colleagues at a working group meeting says, and this is before the announce pts of yesterday, if you look at current trend lines, if you look at current trend lines and you hold the budget flat, by some year 2039 or something like that, all we can afford are military personnel korss.

it's like the norm augustine issue. it is all we can afford is people. nothing to equip them with. nothing to make them ready. so i think this's no question that out of this, the hope in the pentagon is we have to do something to stabilize paying benefits so as to leave resources to equip them. to train them. because everyone is determined to avoid the hollow force. well, one thing to avoid with a hollow force is retaining too much force structure. when you have too much force structure, you underman them. you don't equip them. and you don't train them. i think they're doing a good job of trying to match force structure and force structure cuts, even though as the first chart that david put up shows is that we've had a tremendous increase in dollars being sent.

but not much increase in the end strike. that's what makes this so challenging is we can't just cut people and get to savings that we need. so i think that what we're going to find is out of this process will be finally the executive branch and the legislative branch coming together to do something about unsustainable personnel cost. and then decide how deep that cut will be, over what time and what glide path. >> thaupg, clark. let me provide a few wrap up comments, if you will. and then we'll open the floor for questions. i think it's useful for us to observe that we're not really trying to diminish the difficulty that the defense department had in making the decisions associated with the $487 billion in cuts. i'm quite confident that inside the room as the decisions were being debated, it felt really hard. and for all the constituents involved in each of those, it was really hard.

none the less, it's fair to say that, you know, there's not a lot of, in fact, visible damage from $487 billion of reductions. and that would lead the casual observer, like an appropriator, to say, surely, there must be more. now, se quest ration takes more. and there's a great deal of language out about sequestration that doesn't take into account the law itself. and this is worth pointing out because the basis of any change to the sequestration process. that sequestration provides enormous flexibility to both the executive branch, in general,

and the defense department specifically, in allocating seqeustration cuts. they were all done in the ppa level. every single line item had to take the chain saw approach, as was said yesterday. this sequestration is at the account level. that mean it is appropriation account level. that means the chain saw actually just cuts off, for example, o&m army. and so that would be zero and everybody else would get a bigger cut. or ship construction navy. it doesn't say every line item in the ship construction navy procurement account has to have an equal effect, right? the pentagon has considerable flexibility. it's also, by the way, easy to conceive of an agreement that which would leave the pain of

sequestration, including, perhaps, some modest flexibility year over year. the other part of that equation, though, is that unlike all of those other draw downs, we have, today, present as part of the dynamic, the global financial market. we had -- i mean, the reason we got the budget control act and the sequestration reductions is the threat of default. now, i don't remember the exact clock ticking. i think the president submitted his request on the day that the house came back, so that would have been monday a week ago. so the 15 day clock will probably be reached next tuesday. and that means, i presume, on wednesday morning, our debt ceiling as a nation will go up $1.2 trillion, failing the passage by the resolution a disapproval and the override of a suspected president's veto. so the debt ceiling will go up,

up until we hit it again. now, when are we going to hit it again? good news this morning, 2.8% gdp growth which is a big bump over the previous two quarters. and that indicates probably a little more revenue, a little pressure off how quickly we're going to reach the debt ceiling. low unto us if we reach that during the lame duck session because that throws all of this calculation away. we'll assume sufficient growth rates in the economy that we won't reach that. let's just hope reality keeps up with our estimates, if you will. so let me make some points, then. i think several of the panel here noted that we've got the strategic guidance or the strategy. we have the initial information from the secretary of defense and the pentagon. but we're still missing the real element here, which is the budget itself. and we've got three weekends and two weeks left before we see that, february 13th, monday.

it will be the third time in four years that this administration has been late in submitting the budget. but that's the way it is. so we'll get to see that information. what should you be looking for in that budget as it comes forward. number one is, as todd mentioned, the question of efficiencies. there's $60 billion that the secretary cite. and he cited as a basis of those efficiencies -- and you won't be able to find this as a line item. aggressive and competitive contracting practices. now, that is actually not really an efficiency. that is, in fact, a tightening on margining and fee. and, presumably, on performance. better use of information technology. well, ever since we've created information technology, we have saved money by taking money out of the budget. and i won't be surprised if we do that again. streamlining the staff.

i will confess to be totally baffled as to how i'm going to be able to tell if you've done that or not. i know what getting rid of staff means. that doesn't necessarily mean streamlining. reductions in contract services. this is probably, again, not line items. most contract services are paid for out of the operation and mant innocence account. there's no definitive display of that in the budget. but there are some disturbing trends already under way in the industry itself. and it isn't actually an elimination of contracts. it's a descoping of the requirements for the positions. and i suspect many of you out there who work in these contract environments are seeing this already. the pentagon is saying you know what, i really don't need a master's degree with 10 years of experience in that job. i can take a bachelor's degree with three years experience with a commensurate reduction in the anticipated cost of that. that's fine, as long as that

three-year's experience bachelor's person can do the job. let us hope that somebody made that evaluation before they descoped the requirements. let us not be blinded by false optimism in that regard. and then, finally, better inventory management. and, again, this has been a hallmark. i've only been at this business for 35 years. we've been preaching better inventory management the entire time. what are efficiencies, really? they're what the australians call efficiency dividends. that's what you other going to look for in the bunt. the second is, in fact, some of the unanswered questions. this was a difficult budget process, in part, because the start point wasn't really determined until these guys were wrapped up. and then they had to go back and take into account what congress had already acted on. as a result, a lot of the fiscal year 13 issues that you'll see in the budget were solved by punting them into fiscal year 14 and beyond.

you won't have much viszblety of that, but you'll have a number of hints on those things. and i think over the course of the congressional review cycle for both the authorization act and the appropriations, many of those punted issues will come to light. why? because the pentagon has to start coming to grips with those fiscal year 14 issues, almost immediately. they're already starting to work at the military departments on the fiscal year 14 budget. and it's critical that they get that in place. that's where the impact of failing to account for the additional reductions begins to have real long term consequences. the final piece is i have to say something about base closures. i've spent, you know, a quarter of a century heavily involved in the base closure process. i received an e-mail yesterday from someone who reminded me of a quote i had made three months ago. you're never going to see a brac requested in an election year, especially a presidential election year.

obviously, i have to eat those words. it is a presidential election year and i think on february 13th, and the secretary said it yesterday, we'll see a base closure request. the viability of that request remains to be seen. but there's one particular point that the pentagon has failed yet to perceive. the base closure round is part of their first objective, if you will. there is also, in fact, a push for an expanded overseas base in presence as part of the second element of the strategic review. from the pentagon's point of view, these two are not connected. you could be making reductions for e fifficiency purposes at t same time as you're expanding your overseas infrastructure. but from a congressional point of view, these two are, in fact, absolutely linked together. and we have seen this in every previous base closure round where the typical mentality, whether you're from texas or montana or south carolina or

where ever you have a base that might be threatened, you say you know what, before you close my base, why don't you go get those blank aircraft in blank base overseas and bring them home and put them here instead. until and unless the pentagon does a better job, we're not likely to see movement forward. there's also a question of the role of politics here. and, you know, in each passing administration, each passing election cycle sees a little bit more penetration of politics into the pentagon. and many of you had been at this over the course of careers that stretch back over decades. and we've all witnessed this, if you will. the attempts over the last month or so to align the white house's own objectives with the pentagon's objectives are actually worth lawing, if you will. it's useful to have some alignment, if you will.

on the other hand, the political folks need to be a little bit careful. historically, the greatest contribution that the defense department can make to any election campaign is, in fact, to be allowed to do its job very, very well. and that was the fundamental premise on which the framers created the branchs of government in the first place and set up the friction between the executive and legislative branchs. and i think it behooves us as we move forward here to be able to separate out those decisions and activities that are being driven for political purposes and those that actually contribute cig nif kantly to the capability to provide for the national security of the united states. so i'll close my remarks at that point. and we'll prepare to open the floor for questions. so let me just remind you of the process, if you will. we have microphones here. we'd like you to wait for the microphone so that, in fact, the audience on the web and on television can hear you, as well. you raise your hand, i will

recognize you by pointing to you and saying something. wait for the mic. if you would do two things, one is identify yourself by giving me your name and identify your affiliation. and if you don't have any, then you can do what a registered independent in maryland does and call yourself nonaffiliated. so why don't we start. i think we've got a couple of questions here in the front. let's do the one on that side, first. and then you just pass it across the aisle there. >> good morning, dave, thanks for taking the question. jeremy devaney. this question was actually directed more towards todd and clark. we've heard a lot about the consequences of sequestration. and, yesterday, the question was asked at the pentagon about whether or not they're planning and, again, the response was consequences and not the plan. i was wondering if you could either expand on clark's comments about the alternatives to sequestration? do you see a logical path for legislative roll back? and what do you think the dod is

doing to plan for sequestration and how is industry reacting? let's talk about the alternatives. basically, here's how it lays out. the super committee failed to find 1.2 trillion in deficit reduction. that means, under the law, you're going to find they're going to take 1.2 trillion out of the budget. they do that by allocating half the cuts to defense, half the cuts to nondefense. of the 600 billion allocated to defense, you get to take out 18% for interest savings because you're not going to be borrowing as much. so now you're down to 492 billion. it applies to what's called the 050 budget function that 96% of that budget function is dod. the other 4% goes to the department of energy for nuclear weapons stockpile, things like that. and a few other government agencies. so of the 492 billion that you actually have to cut, about 96%

of that would presumably come out of dod, although there is some flexibility there. now you're talking about 472 billion that has to come out of dod. and it has to be evenly divided over the next nine years that. 's what the law says. so it ends up being about 52 billion would have to come out of the dod budget. so fy-13 budget, 525 billion, you'd have to take another 52. it says you have to have a uniform cut across all the accounts. it ends up being about a 10% cut. all the other accounts have to be cut by a great other amount. now, with that said, what can you do to avoid the messiness of that and the untargeted and unstrategic nature of these across-the-board cuts. well, you're going need the cooperation of congress to do anything. first of all, the pentagon could submit a budget amendment, if you will, that comes in at the

$52 billion reduced number. now, technically, the way the law is written for fy-13, the sequester is a little bit different. it's going to take the 52 billi billion, no matter how much you approa appropriate below the cap. so you write your bill so that it comes in at the lower number. at the very number, you say increase every account in here by about 11%. and then you end up where you want it to be. what's the advantage of doing that? i know it's a game, but it's how you have to do these things. you got to target the cuts. that's better than untargeted. but it's still going to be tough to do. it's about a 10% reduction. what are some other alternatives? well, as the president said, he's not going to take up the pressure -- take off the pressure of the congress to handle the deficit. so what could you do that's deficit-neutral to alter

sequestration to make it a little easier? you could reallocate the cuts across the years. so instead of coming down suddenly and basically staying flat at that lower level, you could make it a gradual decline. it achieves the same dollar amounts over the decade. you would have to decline the defense budget at about a 2% real rate. so adjusting for inflation, 2% decline in real terms over the rest of the decade. that gives you about the same level of total savings as umd under sequestration. so it's a more gradual ramp down. that would be a little smoother. a little easier for dod. >> yeah, the way the law is written, it doesn't take into account time value of money. it's 1.2 trillion. and all the numbers in there are in then year dollars. so you're back loading the kut ifs you take the ramp down

approach i was just talking about. real reduction is less, but that's the way the law is written. >> changing the law. you have to change the law. the super committee was trying to avoid it. the super committee had this unique authority to produce a plan that could get considered by the house and the senate without amendments and it was not going to be subject to the 60 vote closure rule in the senate. that was the easiest way to avoid this. that tuopportunity has passed. now, if they want to avoid this, it's the regular legislative process and they've got to get 60 votes in the senate to do anything. >> the other thing i would add to that is that, as todd pointed out quite accurately, is the only way you can change it is to change the law. what are the circumstances under which the law might be changed?

well, they reach a bargain. bargaining hasn't stopped. you know that every one of these organizations, including up on the hill, including more public ones like this one here, you know, have teams out there thinking about life beyond sequester. you know, and how to deal with that. so there's two kienlds of deals that are out there. one is the deal for the 1.2 trillion. the other deal is the grand bargain. where most, i think, outside analysts say that we need between $3 and $4 billion over 10 years, deficit reductions and revenue increases, otherwise known as tax increases. if there is a grand bargain, defense will be part of that because it represents 40% plus of discretionary spending. you don't get that without defense. so i think there's, at that time, as i said, a subtle form of the washington monument strategy. while you didn't see big, gaudy

cuts in this first round is they err being saved for the second round of negotiations about what will replace sequester. and it can either be a sequester-size deal for how you get that extra 600 billion demanded by the budget control act or it could be two and a half to three billion dollars that addresses the budget fiscal crisis that this country is in. >> i know we want to get to the next question, but let me just also faemphasize that part of tt debate and compromise has to take into account what do the ratings agen sis think about this? and this has never been part of our equation before. go back to november 21st, when the super committee failed and they announced that, in fact, we're going to have to move towards sequestration. from the point of view of the the ratings agencies, this would

you say irrelevant. the dollars were still coming out. didn't matter to them where. from point of view of solvency to the u.s., this is fine. now, if we're not careful, and i'm not quite sure how congress can be careful on this matter, if we start sending the wrong cig n cigales at the wrong times, it says you know what, you guy haves just crossed the line. a line you didn't know was there. a line we didn't define for you ahead of time. a line that may be subjective and irrelevant, but none the less, visible, public and with potential significant impact. this is a different part of the equation, if you will. and one that i think, in other words, you can't just let defense off the hook. without finding that $475 billion somewhere else. >> this is basically for todd and also for clark. todd, you mentioned that the pain where the cuts are for

instance retire all the c5as. retire a large number of c-130s and potentially the brac. for the air national guard, i think that's going to be an ablute salutely red flag. and how much a contentious issue is that going to be with their lobby on the hill of handling that? >> yeah, i mean, i think it's going to be a big issue. you know, you cite add lot of the cuts, you know n the air force. i'll admit my bias here as a former air force reservist and i was in a wing where we had c5as. yeah, they're going to be taken. you're going to see a lot of pushback, you know, once the guard and reserve lobbying, you know, groups get mobilized. i think that they have a lot of influence on the hill. i think we're going to see a real fight about where those cuts occur in the air force. i don't think this is a done deal.

>> i don't really have anything to add. >> you still have the mic? let's go over here to the right, my right, that is, and then we'll come back to the middle here. we've got two guys over here. byron, you get the mic first and then pass it forward. >> okay, dave, i want to ask you a question first and then todd. >> make sure you -- >> that's not adequate for our audience. >> byron cowley. david, when you looked at the program changes, was there anything that struck out as a risk for the industrial base? and, todd, did you think differently on what the glide slump on the investment accounts may be in 13 and 14? from what we had in 12 based on what came out yesterday? >> the industrial base question is really intriguing here. i think what we saw is some evidence of potential concern. what we have had the pentagon

tell us now, both with the january 5th strategic guidance in connection with yesterday's announcement is that there's an increased consideration of industrial based concerns as these decisions are being made. that' all well and good. the real question is not is there increased consideration. but did you actually change a decision to reflect that increased consideration. and, as of yet, we have no evidence that any such change in decision was made. let me give you one example, and this is what you need to know the rest of the details for. announced yesterday, the term naegs of global hawk block 30. that clearly puts the supplier base at risk. the real question of what that level of risk is depend on what's happening in the budget with global hawk block 40. the bands that would have a similar supplier base. and we don't yet know the answer to that question. one might assume if one wanted to give them credit for having that additional consideration that, in fact, looking at